LOOKING TO MAKE ITS FIRST EXPANSION OUTSIDE the U.S., Direct
Edge, an upstart electronic stock exchange, decided in November
to launch a bourse in Brazil to take advantage of the
countrys fast-growing equity market. But rather than open
in São Paulo, the Brazilian business capital thats
home to the incumbent BM&FBovespa stock exchange, Direct
Edge will set up shop in Rio de Janeiro. The citys
booming asset management industry was a key factor in the
decision, as was the fact that the Comissão de Valores
Mobiliários, the Brazilian securities regulator, is
based there, says Anthony Barchetto, head of strategy at the
Jersey City, New Jerseybased firm.

The city government is very keen to bring a proper
exchange back to Rio, Barchetto explains. For us
that is one of the key reasons we opted for Rio. That political
support is very beneficial, in particular when we have to talk
to officials of the CVM.

Rio de Janeiro is known as the cidade maravilhosa 
the marvelous city. Today more than ever, there is
a great deal to marvel at.

Brazils second city, which has languished for decades
in the shadow of its larger rival to the southwest, is enjoying
an unprecedented economic boom. The local asset management
industry is thriving, especially hedge fund managers who find
that Rios financial heritage, natural beauty and
easygoing lifestyle make an attractive environment for doing
business. The discovery in the past decade of vast oil reserves
some 250 kilometers (155 miles) off the Rio coast has attracted
an influx of investment and talent from companies foreign and
domestic, led by state-owned Petróleo Brasileiro
(Petrobras), which has its headquarters in the city. And a
massive investment in infrastructure ahead of the 2014 FIFA
World Cup and the 2016 Summer Olympic Games is fueling economic
activity and promising to overhaul Rios roads, ports and
buildings for the 21st century.

The World Cup and the Olympics are incredibly
important, says Marcelo Haddad, executive director of Rio
Negócios, the citys inward investment agency.
They will raise the citys international profile
greatly. Furthermore, they create fixed dates by which huge
infrastructure projects must be completed. Those plans are
transforming Rio and will make the lives of cariocas [as
residents of Rio are known] a lot easier.

The scale of the investment is staggering. For the two
sporting extravaganzas, the government and the private sector
are expected to spend some 23 billion reais
($13.4 billion) on stadiums, an Olympic village, an
extension of the subway, a new rapid-transit bus network,
hotels and other facilities. The citys revival is also
spurring a range of other investments, such as the
multibillion-dollar Marvelous Port Project, a massive
waterfront development likened to Londons Canary Wharf
that is expected to create 50 million square feet of
high-quality office, retail and residential space.

The oil boom is generating even bigger investment flows.
Petrobras alone plans capital spending of $212 billion
between 2010 and 2014 to develop the countrys offshore
oil resources. The oil and gas discoveries are absolutely
huge and were great news for Rio, says Haddad. The
capital expenditures involved are vast. It is on the scale of
Americas Apollo program to put a man on the
moon.

Although only a fraction of that investment will be spent
directly in Rio, the energy sector is drawing thousands of
executives and engineers to the city and spurring a wide range
of foreign companies  from Russias Gazprom to Dow
Chemical Co.  to establish offices there. Dow came
to Rio because of the amazing opportunities the city
offers, says Lauro Rebouças, director for Dow
Brazil, a subsidiary of the U.S. chemical company, who recently
moved from São Paulo to open the companys Rio
office. Developments in the oil and gas sector were the
major attraction. Its not just Petrobras  all the
worlds most important oil companies, including Shell,
Total and BP, have their Brazilian base here. Its vital
to have an office near theirs.

Rios revival is about more than just investment flows,
as important as those are. The authorities have been moving
aggressively in recent years to repair the citys
stretched social fabric. They have sent teams of police and
army troops into the notorious favelas, or hillside slums, to
root out drug gangs that terrorized local residents, and
extended utility services and transport links to knit those
hillside neighborhoods into the citys economy (see story,
above).

These forces have combined to give Rio a newfound energy and
dynamism: a hint of Houston from the oil money, echoes of New
Yorks financial sector without its gloom, a touch of
Londons cosmopolitan nature, all leavened with the
distinctive joie de vivre of the cariocas.

With a population of 6.3 million 
12.3 million in the greater metropolitan area  Rio
is the second-largest city in Brazil and the fourth largest in
Latin America after Mexico City, São Paulo and Buenos
Aires. It has long had enviable economic strengths. Rios
per capita gross domestic product stood at 25,122 reais in
2008, 57 percent above the national average, according to the
Brazilian Institute of Geography and Statistics. Some 56
percent of Brazils economic output is produced within a
500-kilometer radius of the city; Rio receives a quarter of all
foreign direct investment in Brazil, which totaled
$48.46 billion in 2010, according to the United
Nations Economic Commission for Latin America and the
Caribbean.

Six of the countrys 13 largest companies have their
headquarters in Rio, including Petrobras, mining giant Vale,
mobile telecommunications operator TIM Brasil and EBX, the
holding company of Eike Batista, Brazils richest man.
BNDES, the state-owned entity that is the worlds largest
development bank, with some 625 billion reais
($366 billion) in loans outstanding, is based in the heart
of the city center, just across the street from Petrobras.
Rio is also home to Globo Organizations, the largest media
conglomerate in Latin America, and it boasts nearly a dozen
leading universities, including the Getulio Vargas Foundation,
which operates Brazils top management school.

The citys revival won fresh validation in December
when Moodys Investors Service raised its rating on Rio to
Aaa.br, the highest level on its local scale. Moodys
cited the citys strong finances  the budget had a
gross operating surplus of 17.4 percent of revenue in 2010
 a healthy tax base and reliable transfers from the state
and federal governments. Rio is the only Brazilian city to have
an investment-grade rating from the U.S. agency.

FOUNDED BY PORTUGUESE COLONISTS IN 1565 ON Guanabara Bay,
an inlet of the Atlantic Ocean, Rio de Janeiro served as the
capital of Brazil from 1763 to 1960. Its verdant hillsides
and spectacular beaches provide one of the most stunning
urban settings in the world, with famed Sugar Loaf Mountain
standing at the entrance to the bay and the giant statue
Christ the Redeemer looming over the city from
the top of Corcovado. The rich and glamorous have frequented
the beaches of Copacabana, Ipanema and Leblon since the
1920s. The world-renowned Copacabana Palace hotel was opened
in 1923.

The citys international profile grew following the
release of the 1933 musical Flying Down to Rio, the first
screen pairing of Fred Astaire and Ginger Rogers. In the
mid-60s the bossa nova song Garota de Ipanema
(The Girl from Ipanema), was a worldwide hit.

That same decade Rio fell into decline. The nation moved
its capital to the brand-new city of Brasília, and the
business center of gravity began shifting to São
Paulo. The Rio de Janeiro Stock Exchange, which was founded
in 1820 and long reigned as the countrys largest, waned
after a crash in 1971. It was overtaken in size by São
Paulobased Bovespa later that decade, ceased equity
trading in 2000 to focus on government bonds and currencies,
and was acquired in 2002 by commodities and futures exchange
Bolsa de Mercadorias & Futuros, now part of
BM&FBovespa.

A decade ago Rio looked like a city whose best days were
behind it. Many neighborhoods, including Copacabana and the
downtown area, looked gray and run-down. The city had a
provincial feel, especially compared with bustling,
cosmopolitan São Paulo, home to the bulk of
Brazils expatriate community and most of the best
restaurants. Social order was on the verge of breakdown, with
violent crime rampant in the favelas and kidnappings and
murders commonplace even in upscale neighborhoods. The style
and sophistication of the bossa nova years had given way to a
gritty reality of squalor and mayhem, as depicted in the 2002
Fernando Meirelles film City of God.

It was a bit like New York City in the
80s, says Rio Negócios Haddad.

In the past decade, however, several factors sparked a
turnaround  one that was barely perceptible at first
but gained steam rapidly.

In October 2006 the U.K.s BG Group discovered the
Tupi oil field in the deepwater Santos Basin, off the coast
of Rio. It was the biggest oil find in the Western hemisphere
in 30 years, containing as much as 8 billion barrels.
The discovery led then-President Luiz Inácio Lula da
Silva to declare that Brazil had found its independence for a
second time. Two years later Petrobras announced that it too
had struck black gold in the Santos Basin. The Jupiter field,
located a bit further offshore, is believed to hold between
5 billion and 8 billion barrels of crude.

The twin discoveries have turned Brazils continental
shelf into one of the hottest oil and gas exploration zones
in the world. They promise to transform the economic
prospects of the country, turning it from a large oil
importer to an exporter. Petrobras is ramping up its capital
spending in a bid to more than double its production, from
2.5 million barrels of oil equivalent per day in 2010 to
5.4 million in 2020. As the oil and gas industrys
hub, Rio stands to receive a good share of the newfound
bounty.

Another turning point came in 2007 when Sergio Cabral, the
newly elected governor of the state of Rio de Janeiro, began
a long-overdue crackdown on crime in the city. The
governor decided that the level of violence was
unsustainable, says Rio Negócios Haddad.
Here we were, living in one of the most beautiful
places in the world, but the quality of life was being
undermined by all the killings and by all the
crime.

The authorities created pacifying police units
to enter no-go areas in some of the citys most
dangerous favelas, arrest drug traffickers, break up
organized-crime gangs, and restore or improve public
services. The program has had its trials, to be sure. In one
early operation, an invasion by heavily armed police and army
troops of the Vila Cruzeiro favela in November 2010 left 31
people dead. But the initiative has managed to clean up 19
favelas so far, and authorities aim to reclaim a further 21
neighborhoods over the next two years.

The pacification drive is crucial to bridging the vast
socioeconomic gap between Rios slums and wealthy
neighborhoods like Leblon, an exclusive coastal enclave on
the southern end of the city. You cannot really escape
from the favelas in Rio, says Gordon Lewis, a Briton
who is joint partner and founder of LondonRio, a commercial
and residential property developer. They are dotted all
over the city. Executives may live in Leblon, but a
companys security guards and window cleaners will live
in the favelas. That is why its important that the
favelas are being sorted out.

The final key element in Rios revival: the 2014
World Cup and the 2016 Summer Olympics. In 2007, Brazil won
the right to host footballs quadrennial festival, with
several matches, including the tournament final, to be held
in Rio. Two years later the International Olympic Committee
awarded the 2016 games to Rio, which beat out competition
from Chicago, Tokyo and Madrid. This will be the first time
that one city has hosted the worlds two largest
sporting events in succession, and it is a dramatic symbol of
Rios renaissance.

The twin events are spurring an unprecedented construction
boom in and around the city. Rios famous
Maracanã Stadium is undergoing a $1 billion
renovation to make it a fitting venue for the World Cup final
and the opening and closing ceremonies of the Olympic games.
Last month the city completed its first Olympics venue, a
renovation of its famed Sambódromo stadium, just in
time for the annual Carnival celebration.

The city is spending $8.3 billion on overhauling its
transportation infrastructure. It is building 150 kilometers
of roads for a new rapid-transit bus system to connect
Rios northern and western zones, with dedicated lanes
for articulated buses capable of carrying up to 300
passengers each. The project, which includes the purchase of
1,300 buses, is being financed by the federal, state and city
governments, with loans from the World Bank and
Inter-American Development Bank. Rio will be the only
major city in Brazil that will have a mass rapid-transit
system between the city center and the international
airport, says Rio Negócios Haddad.

All of these factors have created a powerful momentum and
made Rio a magnet for people  and money  from
across Brazil and around the world.

Dow Brazils Rebouças says the company was
attracted to Rio by more than just oil. There are big
opportunities for Dow coming from the huge infrastructure
projects under way in the city, he says.
Its no longer São Paulo that is attracting
the countrys top talent. All the top engineers in
Brazil now want to move to Rio.

Rebouças jumped at the opportunity when his bosses
asked if he would like to open up Dows Rio office. A
33-year veteran of the chemicals company, he stared out at a
concrete jungle from his old office in São Paulo. From
his new digs on the 35th floor of the Rio Sul Center, one of
the citys tallest buildings, he has an unimpeded view
of the lush green slopes of Sugar Loaf and can see Copacabana
beach in the distance. Quite a few multinational
companies have opened up their head offices in São
Paulo, but their Brazilian chief executives all live and work
in Rio, he contends. The only problem about Rio
is the commute to work. Carioca drivers are crazy.

Technology is a major driver of Rios economy. EMC
Corp., a Hopkinton, Massachusettsbased data storage
company, opened its first Latin American office in Rio in
1997 because of the surge in local demand for information
technology products and services following the privatization
of Telebras, the national phone company. EMC is currently
investing $100 million over five years to strengthen its
manufacturing, sales, and research and development
capabilities in Brazil, including the construction of a new
research facility at a technology park on the campus of the
Federal University of Rio de Janeiro, on the citys
northern side. The park is home to some of the most advanced
research activities in Brazil. Petrobrass main research
center, known as Cenpes, is there. Other companies with
major facilities at the park include Eletrobrás, the
Brazilian state-controlled energy giant, and the U.S.s
General Electric Co.

One of our biggest clients is the oil and gas
sector, says Carlos Cunha, general manager of EMC
Brasil, from his office in Barra da Tijuca, a commercial and
residential neighborhood on the Atlantic, southwest of the
city center. Companies in the sector have to
process huge amounts of data. Rio is also home to some of the
best universities in Brazil. The talent pool is huge.
EMC says its business in Rio is expanding by 15 to 18 percent
every year, compared with a growth rate of 8 to 10 percent in
São Paulo.

Rios financial services sector is also expanding
rapidly. Direct Edge is seeking regulatory approval for its
new exchange and expects to launch in the fourth quarter of
this year. It is in the process of recruiting a Brazilian CEO
and looking for office space.

One of the reasons we chose Brazil is that the
countrys capital markets have a compound annual growth
rate of 30 percent, says strategy chief Barchetto, who
has been spearheading the Brazilian expansion.
Furthermore, there is no exchange like ours in Brazil.
If we were to go to Europe, we would have 20-odd competitors
straightaway. In Canada we would have four or five. Brazil
just makes sense.

Rio makes sense for Direct Edge because of its buoyant
asset management industry. Although São Paulo remains
the countrys financial capital and is home to big banks
such as Banco Bradesco, Banco Santander Brasil and
Itaú Unibanco, Rio has managed to hold on to the
pension, asset management and hedge fund industries. The city
is home to Gávea Investimentos, the $7.1 billion
asset manager and hedge fund specialist acquired by JPMorgan
Chase & Co. last year; Polo Capital Management, a
$1.7 billion hedge fund manager; Petros, the
55.6 billion-reais pension fund for Petrobras employees;
and Previ, the giant pension fund of Banco do Brasil, which
manages 152 billion reais.

The first investment banks in Brazil, such as
Pactual and Garantia, were founded in Rio at the time when
the city still dominated the countrys financial
landscape, says Otávio Vieira, chief operating
officer at Fides Asset Management, a hedge fund firm based in
the citys Barra da Tijuca district, with
270 million reais under management. Many of those
guys went on to set up the first independent asset managers
in the country in Rio.

André Roberto Jakurski, a founding partner of JGP,
a hedge fund manager with 4.8 billion reais of assets,
had been among the original founders of Pactual. GAP Asset
Management, which oversees about 1.5 billion reais, was
created in 1996 by Carlos Camacho, Emanuel Pereira da Silva
and Renato Junqueira after they sold their stakes in Banco
Cindam.

São Paulo will continue to dominate financial
services in Brazil because that is where the big banks are
based and also its home to the headquarters of so many
Brazilian corporates, says Vieira. Its a
bit like New York City. Rio is becoming the Boston of Brazil,
the place where all the independent asset managers want to be
located.

Vieira had worked for Safdie Asset Management, another
leading alternatives firm, in São Paulo, but he moved
to Rio when he was offered the chance to become a partner at
Fides. I would have stayed in São Paulo if Fides
had been based there, he says. However, I am a
carioca, and its obviously a plus that the shop is
based in Rio.

With so many businesses looking to move to or expand in
Rio, prime office space is suddenly in very short supply,
leading to a surge in property prices.

One of my clients is Gazprom, says
LondonRios Lewis. It is very keen to come to Rio
because of the opportunities in oil and gas. However, it has
had big problems finding the right kind of office space.
There is just so little around.

The most expensive property can be found in Leblon, where
prices jumped by about 40 percent just in the past year,
reaching as high as 50,000 reais per square meter, the
equivalent of $2,700 per square foot. The neighborhood, a
largely residential area thats also home to several
hedge fund firms, is as small as a string bikini, stretching
just 16 blocks along the coast and extending no more than
five blocks in from the beachfront. Zoning restrictions limit
the height of attached buildings to three stories to avoid
casting shadows on the beach.

To meet the growing demand, developers are concentrating
their efforts in two areas. One is Barra da Tijuca, a coastal
district on the citys southwest side where the Olympic
village is being built. The area is about a 40-minute taxi
ride from downtown Rio, which some consider remote, but it
offers the kind of capacity that is in short supply
elsewhere. There are at least 50 new commercial tower
blocks under construction in the Barra da Tijuca
district, says Sergio Freire, CEO of Brasil Brokers.
Many companies can find larger office space and are
locating there.

The other big development is the Marvelous Port Project,
the largest urban renewal undertaking in Brazil. Using a
public-private partnership, the project aims to renovate the
sprawling, run-down port thats near the historic city
center. It is expected to take up to 15 years to
complete and will include a mix of office and retail space,
museums and other cultural facilities, and housing. The
master plan calls for the renovation of roughly
10 million square feet of warehouses, 30 million
square feet of historic buildings in the ports
preservation area, and new construction.

Rio suffers from a shortage of good hotels. The city has
some 30,000 hotel rooms, a number that is supposed to rise to
43,000 in time for the Olympics. Prime properties are in
short supply, though, a fact that produces some of the
worlds highest room rates and most-feverish hotel
investment.

All the major hotels on the beachfront have changed
hands during the past five years, says Cláudio
Castro, commercial director at Sergio Castro Imóveis,
one of Rios biggest property owners and managers.
Between 1973 and 1998 the hotel business in Rio was
terrible. Hoteliers just could not make any money. Today they
are making a fortune. Five-star hotels in Rio charge
north of $450 a night, and three-star establishments cost
about $200 a night  when an available room can be
found.

A prime example of Rios renaissance is the Hotel
Gloria. Opened in 1922, it was one of the citys iconic
grand hotels, along with the Copacabana Palace.
Batistas EBX bought the fading hotel in 2008 for
$50 million and embarked on a thorough, 200
million-reais renovation. The renamed Gloria Palace Hotel is
due to reopen next year with 231 rooms. The property will
also serve as the headquarters of Batistas empire, and
a symbol of Rios reclaimed glamour and
prosperity.  

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